The Reserve Bank of Australia surprises on 50 basis points rate hike

Australia’s central bank surprised markets on their June policy meeting by raising its cash rate by 50 basis points to 0.85% vs widely expected 0.25% hike.

The RBA already lifted rates by 0.25% in May, in the first rate raise since 2010.

Today’s move marks the biggest rate increase since early 2000 and points to the seriousness of the situation, signaling that the central bank is on track for more hikes to bring soaring inflation under control.

The RBA’s governor Lowe said that current inflation pressures in the economy and still very low interest rates prompted the central bank for more radical action on today’s meeting and pointed to the expectations that the Board will take further steps in the process of normalizing monetary conditions in coming months.

Today’s decision suggests that the central bank acts in the similar manner like the other major central banks and has left the door opened for further 0.5% hike in July, with expectations to bring interest rate to the levels around 1.5% in August, after inflation rose to 5.1% in the first quarter, the highest in two decades and will likely rise further in the second quarter.

The central bank signaled it will stay in the same mode until bringing interest rates to neutral zone, which is, according to Governor Lowe around 2.5%, but rates could rise to near 3%, on fears of the impact of soaring inflation, though economists doubt such move as Australians are sitting on A$2 trillion in mortgage debt that is very sensitive borrowing costs.